While Nobody Was Paying Attention, The Bank Of Japan Took A Surprise Step That Could Change The Future Of Central Banks

Over the past few weeks, there's been a growing buzz about
central banks playing a greater role in explicitly serving as
funders of government.

The idea that people (journalists and Wall Streeters, mostly)
have been talking about is the notion that central banks could
buy government debt (as they do in quantitative easing)
but then just rip up those bonds, and cancel the debt, with
few consequences, except perhaps some inflation (which central
banks wants, anyway).

This kind of blatant monetization seems unlikely (especially in
countries like the UK and the US, which are borrowing at
super-low rates) but the idea of central banks working more
closely with their government to stimulate the economy may be on
the road to happening.

While the US was distracted by all of the Sandy and election news
this week, the Bank of Japan took a shocking step in this
direction, according to David Zervos of Jefferies, who notes that
the latest easing announcement was a joint production between the
Bank of Japan and the Ministry of Finance, amove that never
happens:

BoJ policies, by virtually any measure, have been an abject
failure. The institution has consistently remained too tight in
the face of worsening economic conditions for over 2 decades. And
while the economy has had to pay a horrible price for these
errors, the tables look like they are about to turn in a nasty
way on the institution itself.

Accompanying the depressing standard BoJ statement on 30-Oct was
this very curious additional release - http://www.boj.or.jp/en/announcements/release_2012/k121030b.pdf.
Here we have the BoJ governor, the Minister of Finance and the
Minister of State for Economic and Fiscal Policy jointly issuing
a press release on the BoJ website entitled - "Measures Aimed at
Overcoming Deflation". A press release of this kind is completely
unprecedented. And it was published in the "Monetary Policy
Releases" section of the BoJ website.

So here we have two executive branch government ministers issuing
declarations on the monetary policy portion of the BoJ website
regarding price stability. Can anyone imagine if Tim Geithner, Ben Bernanke and Hillary Clinton were to issue a joint
statement on fighting deflation that was in turn prominently
displayed under in the monetary policy section of the Fed's
website? It would be mutiny!

The executive branch
politicians in Japan have, for the first time ever, infiltrated
the mother ship. BoJ independence is now under explicit political
attack. This should be a warning to all central
bankers with "sound money" religion - if you don't let the
inflation dogs out and crank up the printing presses as the
economy deteriorates, the politicians will come and shut you
down. What we are witnessing is the beginning of the end for
independent Japanese monetary policy.

Japan’s failure to emerge from its deflationary mire has been
both a tragedy and testament to the hazards of asset price booms;
but it has also encouraged an entertaining verbal interplay
between successive governments (yearning a constant drip of
palliative policy easing) and central bank (keen to enforce its
own independence.) The interplay, at MOF’s instigation, has
ranged from mild insinuation (per the need for more policy
easing) to outright threats to the Bank’s independence; but
today’s policy decision perhaps shows that the BOJ board’s
current incumbents are keen to keep the peace.

...

The question that inevitably arises in the wake of today’s
asset-purchase top-up therefore is to what extent government
pressure, and the presence of economy minister Maehara,
influenced the decision? In view of the unwavering emphasis that
Shirakawa has placed upon reform (as recently as last week in
fact) and upon the impotence of monetary easing in its absence,
it is very difficult to believe that politics was not a factor.
Yet if keeping the peace was an element in today’s decision, then
Maehara and co may be forgiven for looking to leverage this
‘susceptibility’ between here and the as yet undeclared date for
the next general election. Indeed, note that when Seiji Maehara emerged
from today’s meeting, he said, “We have confirmed that we will
make the utmost efforts to achieve the common goal with a strong
sense of responsibility.” ‘Will’, ‘common goal’, ‘strong sense of
responsibility’? The BOJ’s next meeting on November 19th and its
aftermath could well be very interesting.

So it's possible that this presages a change in central bank
policy around the world, but it's worth noting the idea that it's
pressure from the Ministry of Finance that's pushing the BoJ to
act, whereas in the US, the current winds prevail in the opposite
direction, towards less easing.

Still, for a country that's been mired in deflation, it will be
fascinating to watch whether there's any beneficial impact from
this kind joint Ministry Of Finance/BoJ action.